In a shock that sent global equity markets into a dive, the U.S. economy added just 69,000 jobs in May, less than half what analysts expected and well below what is seen as needed to keep the jobless rate moving lower. Readings for the prior two months were also revised down, while the unemployment rate rose for the first time in almost a year, to 8.2 percent.

The Labor Department report dealt a blow to confidence in the U.S. economic recovery, which until recently had contrasted with Europe's deteriorating economic situation and seemingly intractable political crisis over government budget deficits.

"The negative employment data caps the recent deterioration in global economic data. From Chinato Europe to the U.S., all the data have shown real slowing," said John Kilduff, partner at Again Capital LLC in New York.

The jobs figures, which raised expectations for another possible round of monetary easing from the Federal Reserve, also carried an important political dimension.

If sustained, the weakness in employment could threaten President Barack Obama's bid for reelection in November. His challenger Mitt Romney said the data was "devastating news" for American workers.

Worsening economic conditions were also being felt in major emerging countries such as Braziland India, causing some economists to wonder just where growth is going to come from.

"The global economy downshifted sharply in May, and judging by these data, the U.S. followed suit," said Michelle Girard, economist at RBS.

U.S. stocks fell sharply as the employment numbers compounded worries about upcoming elections in Greece and banking troubles in Spain, pushing the Dow Jones industrial average down over 2 percent on the day, and negative for the year. Treasury bond yields, in contrast, continued to hit record lows across the board as investors scurried for safety.

In Britain, manufacturing activity shrank at its fastest pace in three years last month as the global economic slowdown hit demand for its goods.

Markit's Eurozone Manufacturing Purchasing Managers' Index dropped to 45.1 in May from 45.9 in April, slightly above a preliminary reading but marking its lowest level since June 2009.

It has been below the 50 mark that divides growth from contraction for 10 months. Similarly, the output index fell to 44.6 from April's 46.1, also the lowest since June 2009.

U.S. manufacturing proved a bit more resilient, with the Institute for Supply Management's index falling modestly in May but still at a respectable level of 53.5. New orders also rose to their highest since April of 2011.

CORE CONSTERNATION

Earlier data from France and from Germany, Europe's largest economy, showed their manufacturing sectors contracted at the fastest pace in nearly three years. It was only German strength that had prevented the euro zone falling into recession in the first quarter.

Italy's factories contracted for the tenth straight month, while in Spain the PMI fell below that of Greece's, and posted the lowest reading of all the countries surveyed.

The news in Britain, linked inexorably to the fortunes of the euro zone, was little better.

The UK economy is mired in its second recession in two years and its PMI plunged to 45.9 last month, its lowest reading since May 2009 and the second-steepest fall in the survey's 20-year history. Analysts had expected a more modest dip to 49.8.

The euro zone's economic deterioration prompted more than a third of economists polled by Reuters this week to say the European Central Bank will cut interest rates from their record 1.0 percent low before the end of the year to boost growth.

"Fundamentals certainly justify a rate cut any time soon. However, the ECB might keep some powder dry at next week's meeting and wait for the outcome of the Greek elections - and future of the monetary union - to change its policy stance," said Annalisa Piazza at Newedge.

Greece, which unleashed the financial maelstrom that has ravaged the bloc, is due for a crucial second election on June 17 that may determine whether it remains a member of the currency union.

Recent Reuters polls of fund managers, economists and money market traders have all suggested that the battered economy will still be a member of the 17-nation bloc come 2014.

BRICS TAKE A HIT

Declines in two gauges of China's manufacturing sector were particularly worrying for investors looking to the world's second-biggest economy - the main engine of global growth in recent years - to pick up the slack created by Europe's debt crisis and the sluggish U.S. economy.

China's annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009. That could pile pressure on authorities to attempt further stimulus.

The country's official purchasing managers' index - covering China's biggest, mainly state-backed firms - fell more than expected to 50.4 in May, the weakest reading this year and down from April's 13-month high, with output at its lowest since November 2011.

India was also feeling the pain. Growth in its gross domestic product slumped in the first quarter to a nine-year low of 5.3 percent as the manufacturing sector contracted.

Brazil's economy barely expanded in the first quarter, setting the stage for another disappointing year and casting new doubt on the health of emerging markets. The economy grew just 0.2 percent compared to the final three months of 2011, less than half the pace economists expected.

Things look to have remained weak so far in the second quarter too, with HSBC's manufacturing index for Brazil holding steady at 49.3, below the 50 mark that separates growth from contraction.

(Reporting by Fiona Shaikh in London, Nick Edwards and Lucy Hornby in Beijing, Se Young Le and Choonsik Yoo in Seoul, Sumanta Dey in Bangalore, Chikako Mogi in Tokyo, Luke Pachymuthu in Singapore and Lucia Mutikani in Washington; Editing by Kenneth Barry and James Dalgleish)